Loan officers offering the FHA203k loan program are seeing an upswing in homebuyers interested in the product, but still not as much as they’d expect.

“Only 1.5% of all FHA volume is 203k,” said Jim Fraser, president of RenovationReady. “We think this market should be at least 5% of the FHA market.”

The Government-insured loan allows homebuyers the opportunity to buy and fix up a property without exhausting their personal savings. Instead, they can purchase a property and tie in whatever costs to make required repairs or desired updates to one 30-year fixed loan.

Fraser said RenovationReady has seen a three-fold increase in their business in the last six months.

Outdated windows, siding, floors and roofs plague the ageing housing market, with the majority of homes having been built before 1972, said Dale Wheeler, product administration manager for IMPAC. And as housing inventory dwindles, the chances that a homebuyer will need to make a purchase requiring more TLC rises, he said.

An originator can become an added value to a realtor by helping the borrower get into that property and make it their own, Wheeler said.

It’s often described as an “underutilized” product, but there’s a reason more independent mortgage originators aren’t offering the 203k loan.

Originators, mortgage bankers and many banks often don’t have the management infrastructure, systems, policies and procedures in place to execute these transactions effectively, according to Fraser.

Christine DePaepe, a 203k division manager in Chicago for Guaranteed Rate, likened the 203k to a reverse mortgage in that the loan officer needs additional education on the specialized loan to understand and execute it successfully.

Major lender Guaranteed Rate is originating about 20 203k loans a month, but DePaepe, who came from a small shop herself, said she only knows of a handful of independent shops that have tried to handle the loans, and “it’s painful for the clients.”

“Recently I had a woman come to me whose broker company stopped in the middle of the transaction, they just couldn’t complete it,” she said. “A lot of people don’t do FHA, then all the sudden they’re trying to do the hardest FHA out there.”

Fraser agrees, saying that unless they hire an outside firm to help, the loan officer and processor have an overwhelming amount of paper to chase, from ensuring bids aren’t too high or low to vetting contractors to coordinating with a HUD consultant. In turn the real estate community can see them as problematic because the loan can take from 90 to 120 days to close.

The loan type still carries a negative stigma from past inexperienced loan officers who did try to close them, but just didn’t have the knowledge to do so, said Jonathan Blackwell, a senior mortgage banker and renovation loan specialist with PrimeLending.

“It’s a niche product, so it allows you to better serve your customer,” Blackwell said. “But it is more involved and requires expertise, which is why a lot of originators don’t offer it.”

There aren’t a lot of wholesale investors who support brokers in this product, adds Fraser, and those who do will only accept the Streamline version, which is where originators get into trouble trying to shoehorn loans into streamline parameters when they should be standard.

“Because of the limitations of investors, you can end up with a misfit between the originator and the property requirement,” Fraser said.

Despite limitations to smaller shops, the 203k could still be a housing hero if executed correctly by larger lenders.

“It opens up the pool of available properties, which is good for everyone,” Blackwell said.

Fraser said in addition to current retail and correspondent clients, two nationwide wholesalers have approached RenovationReady for support in getting into the wholesale FHA203k market.